When looking to rent or purchase real estate in New York, two different instruments of payment that are used to secure one’s interest are security deposits and down payments. Renters will usually deal with security deposits to ensure their tenancy, while buyers will often be required to make a down payment.
A security deposit is a sum of money given by the tenant to the landlord. It ensures that the rent will be paid and the responsibilities under the lease will be carried out according to the terms and for the length of the lease. The amount is equal to one month’s rent, which is mandated by the new rent regulation laws passed in July 2019.
Landlords have specific duties to ensure that the tenant’s security deposit is protected. For example, if the security deposit is placed into a bank account, the tenant must be notified in writing of the name and location of the bank. Or, if the account is interest-bearing, then the landlord is entitled to collect an annual fee of 1% of the security deposit.
In addition, landlords are prohibited from commingling the money; in other words, they can’t use the money for personal interests or anything other than security deposits. For properties with six or more different tenants, landlords are required to keep the security deposit in an interest-bearing account. Then, once the term of the lease has expired and if the tenant has complied with it, the tenant is also entitled to the accumulated interest on their security deposit.
Moreover, when the landlord receives the security deposit, they must provide the tenant with a receipt. This can be helpful for both parties to keep track of the details of the transaction, which should include: the amount that was paid, all party names, the date the payment was received and the signatures of both parties.
What Happens When the Lease Ends
Under the new rent laws, landlords must return the security deposit to the tenant within 14 days of the tenant vacating the unit. If the landlord had to deduct any fees from the security deposit, they must provide the tenant with a detailed invoice of the fees incurred and what they were for. For instance, typical deductions include anything from damages to missed rent payments.
Furthermore, the terms of the lease will specify whether the landlord or tenant is responsible for paying for “wear and tear” repairs. If the cost of the repairs were to surpass the agreed-upon amount, the landlord may use money from the security deposit toward the difference. This would qualify as a legal deduction from the security deposit.
Those who purchase real estate in New York also have to provide a type of deposit, but in the form of a down payment.
A down payment is a lump sum, cash payment paid by a buyer when purchasing real property. It’s usually expressed as a percentage of the total purchase price; in New York, this is usually between 10-20%, but it can vary. The down payment is paid when the buyer signs the contract of sale, which is the beginning of the transaction.
Then, the down payment is deposited into the account of the seller’s attorney, who acts as the “escrowee.” This account is separate from all other checking accounts that an attorney holds, and has many regulations; an Interest on Lawyer Account (IOLA) can also be interest-bearing or non-interest-bearing.
How Down Payments Work
Once the seller and buyer have agreed to what will be paid upfront, the buyer will have to deliver this payment to seal the deal. Additionally, contracts often allow the seller to terminate a deal if a sufficient down payment cannot be honored. However, if a down payment is accepted, then both parties sign and are considered to be “in contract.”
Where Down Payments Go
A down payment cannot be used immediately by the seller for personal use. Instead, an attorney may deposit the payment into an escrow account for safe keeping. These accounts, unlike security deposits, are not interest-bearing.
It’s also important to note that the money in escrow may not be withdrawn until closing; or, if there is a dispute over the down payment, the money may not be withdrawn until a written agreement is signed between the two parties or a judge determines who the down payment belongs to.
Refunding Down Payments
A down payment is intended to secure a buyer’s position in the purchase of real property and for the seller to ensure that the purchaser will reach the closing. As such, the refundability of a down payment depends upon the original terms of the agreement. The standard New York state contract of sale has many rules and regulations regarding the down payment and the escrowee.
So, it’s important to make sure that the contract clearly states scenarios in which the payment will and will not be returned. For example, a buyer might be entitled to a refund of their down payment when their contract is contingent upon obtaining a mortgage commitment and the buyer fails to receive such commitment. In this case, the buyer is entitled to a full refund of their down payment.